Deutsche Bank, DrKW Eye Their First Securitizations Of Counterparty Risk

Deutsche Bank and
Dresdner Kleinwort Wasserstein
are looking at securitizing the counterparty risk in
their derivatives books for the first time. Although neither firm
has made a commitment to the transaction, Deutsche Bank is further
down the road and expects to structure a deal within six
months.
Peter
Haagensen, director and global risk
officer for over-the-counter derivatives at Deutsche Bank in
London, said any deal it brings to market likely will have a
notional size of at least USD1 billion with a maturity of five to
10 years. The only other firm known to execute this type of
transaction is
UBS
Warburg, which did two transactions,
Alpine I and II, in which it securitized counterparty credit risk
from its interest-rate swaps, options and currency swaps books (DW,
10/17/00, DW, 9/2/02).

David Murphy, head
of counterparty portfolio management at DrKW in London, said the
firm recently merged its loans and counterparty risk portfolio
management. "We are actively investigating similar structures to
Alpine," he said, adding that the decision will be based on
comparing securitizing loans through a traditional collateralized
loan obligation with securitizing counterparty risk to determine
which is better for economic capital and regulatory capital
relief.

"We're going through a phase where every large
bank is looking at [its counterparty credit risk]," said Deutsche
Bank's Haagensen. He explained that this risk can be distributed
from banks to investors, eventually driving down the cost of
transactions to corporates and other counterparties. "This should
give banks the appetite to do more swaps and be one more step
toward allocating risk," he added.

In the Deutsche Bank deal, the credit-linked
notes would be tied to the mark-to-market value of the swap, giving
investors a variable notional value. He noted that most of the
swaps included in such a transaction would be in-the-money. In the
Alpine transaction, losses in the underlying portfolio are financed
through a bite out of the coupon and the principal.

Mark Ritter, global
head of credit exposure management at UBS in Greenwich, Conn., said
the firm will continue to structure similar transactions in the
future. "We hope other banks will consider doing transactions of a
similar nature in this growing asset class," said Ritter, adding
that it adds validity to the instrument.